Politics of pushing: behavioural economics a revenue game-changer

Police are using psychology to get people to pay fines on time. Photo: Ryan Osland

About 18 months ago, the NSW Premier's department quietly set up a small team with a unique brief. It was dubbed the "nudge" unit because its goal was to influence people's behaviour using insights drawn from economics and psychology rather than regulation and red tape.

The plan drew on the relatively new discipline of behavioural economics that has challenged traditional assumptions about how consumers, and citizens, behave. Behavioural economists have drawn attention to human biases that cause people to make choices that seem contrary to their best interests.

The theory is that those same biases - such as shame, the desire to conform and even vanity - can also be used to nudge people to make superior choices that save governments and citizens time and money. The approach was made popular by University of Chicago professor Richard Thaler, who co-wrote the 2008 book Nudge: Improving Decisions about Health, Wealth and Happiness.

The NSW government's new nudge team - or the Behavioural Insights Unit as it's officially known - began a series of trials to find out if the strategy would work in NSW.

It's possible you've already been nudged by one of the experiments. Over the past year, thousands of people across NSW have been steered into making superior decisions because of interventions designed by the nudge unit.

Some of them have been as simple as a re-worded letter or a less complicated hospital form. But the results have been impressive. Changes made to penalty notices have resulted in an extra $10 million in fines being paid on time and a big fall in driving licence suspensions. In another trial, simplifying the way patients can opt to use private health insurance while in a public hospital will deliver $11 million in additional revenue and cost savings that can be deployed to front-line services.

The strategy relies heavily on randomised controlled trials. These trials normally take a population of interest - say those receiving enforcement notices - and divides them into two groups. One group receives the newly worded notice while the second ''control group" receives the existing notice. These trials allow comparison of the effectiveness of a new intervention against what would have happened if nothing had changed.

Take the NSW nudge unit's project to increase payment rates for taxes, fines and debts. New penalty notices introduced a clear call to action and a prominent stamp with the words "Pay Now". Language and colour was used to escalate the tone of the communications - the text was shifted from blue to red as people moved further into an enforcement action and words changed from "amount owed" to "you owe". The new penalty notices also played on the human bias to conform by adding a factual statement such as "more than eight out of 10 people pay their land tax on time, making you one of a small minority who has required us to take further action". Payments made in response to the newly drafted enforcement order were 3.1 percentage points higher than for the existing one.

Some of the biggest names in behavioural economics gathered in Sydney this week for the Behavioural Exchange 2014 conference. One of the speakers was David Halpern, director of Britain's behavioural insights team, which is recognised as a global trailblazer. The NSW nudge unit has recruited members of Halpern's team and draws heavily on its methods.

Halpern says nudges have long been deployed - encouraging people to bathe between the flags on beaches is one example - but the systematic use of behavioural insights across the whole of government is a potential game changer.

"If we keep doing this and get lots of incremental improvements - a few per cent here and a few per cent there - you can transform the delivery of services," he said. "The efficiency gains just waiting there are absolutely enormous.''

Behavioural economists have much bigger goals than just reworking government forms.

Harvard professor and leading behavioural economist David Laibson says the nudge agenda has only started to scratch the surface.

"What we need now are armies of people who are trained in taking this knowledge and spreading it out to other areas of human behaviour," he says. "There's a limitless set of ways we can tweak things and get small efficiency improvements each time."

So far, the official nudges in NSW have mostly been deployed in areas where outcomes can be easily measured, like revenue collection. A report released this week by the Behavioural Insights Unit detailed a series of successful trials. But the unit has its sights set on more challenging policy areas in health, social housing, domestic violence and the return to work of employees with long-term injuries.

"We've already achieved some good results,'' Premier Mike Baird says. ''But the use of behavioural insights in government has the potential to tackle bigger and more complex social problems and help transform the customer experience across the public sector."